From the Wikipedia:
"Freemium is a business model which works by offering basic services for free, while charging a premium for advanced or special features. The word freemium is a portmanteau created by combining the two aspects of the business model: free and premium. The business model has gained popularity with Web 2.0 companies." (http://en.wikipedia.org/wiki/Freemium)
The Types of “Free”
One of the key factors in making Freemium work is the structure of the offering. What is it that you offer for free vs. charge? There are different types of free strategies. Let’s take a look at the popular ones:
1. True Freemium – Give a version of the product for free and charge a fee for the other versions. There are two ways to go about this:
- Value based – The most successful type of Freemium strategy. The more a customer uses the product, the more value she derives, the higher the switching costs are, and at some point she’ll hit a usage limit and convert to a paying customer. Evernote and Dropbox are beautiful examples of this.
- Characteristic based – For example offering the product for free for one user (so it is based on company size for instance). Let’s think about a B2B application. If I’m a freelancer, I will use the application forever and I will never have to upgrade. If I’m a 3-person company, I can’t add more users and try the application for real and hence might not get to the point where I see the value in using it.
2. Free Product for a Cross Subsidy - Give one product for free and charge for complementary products.
3. Time Based Free Trial – Give a free trial for X days and start charging once the trial ends. The issue here is figuring out what X is. On one hand you want to create a sense of urgency, on the other hand you need the customer to see the value in the system." (http://techcrunch.com/2011/09/04/complete-guide-freemium/)
Open Source as a Free model
Lately I’ve seen many entrepreneurs confuse Open Source with Free so I thought it would be helpful to make the distinction. An open source model can definitely accelerate the distribution of your product and is a viable free model. It has two main advantages. You might get developers to contribute to your product (see WordPress). By doing that you can accelerate the development of your product. The other advantage is that you give customers peace of mind as they have control over the source code. You can then make money from selling pro features or value added services. There’s a critical distinction here and that is that your code is out there and anyone can start a company to commercialize this code. Bear in mind that it is very hard (often impossible) to reverse a decision to open-source." (http://techcrunch.com/2011/09/04/complete-guide-freemium/)